Logo of jester cap with thought bubble.

Image source: The Motley Fool.

BlackRock Capital Investment Corp (NASDAQ:BKCC)
Q1 2020 Earnings Call
May 7, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Vicki, and I will be your conference facilitator today for the BlackRock Capital Investment Corporation First Quarter 2020 Earnings Call. Hosting the call will be Chairman and Interim Chief Executive [Phonetic], James Keenan; Interim Chief Financial Officer and Treasurer, Michael Pungello; General Counsel and Corporate Secretary of the Company, Laurence D. Paredes; Marshall Merriman, Head of Portfolio Management for BlackRock's U.S. Private Capital Group; Jason Mehring, Capital -- Chairman of the U.S. Private Capital Group's Investment Committee; and Nik Singhal, Head of Investor Relations and Business Strategy.

Line have been placed on mute. After the speakers' complete their update, they will have open lines for the question-and-answer session. [Operator Instructions] Thank you. Mr. Paredes, you may begin the conference call.

Laurence D. Paredes -- General Counsel and Corporate Secretary

Good morning, and welcome to BlackRock Capital Investment Corporation's first quarter 2020 earnings conference call. Before we begin our remarks today, I would like to point out that certain comments made during this conference call and within corresponding documents contain forward-looking statements subject to risks and uncertainty. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may and similar expressions. We call to your attention the fact that BlackRock Capital Investment Corporation's actual results may differ from these statements.

As you know, BlackRock Capital Investment Corporation has filed with the SEC reports, which list some of the factors which may cause BlackRock Capital Investment Corporation's results to differ materially from these statements. BlackRock Capital Investment Corporation assumes no duty to and does not undertake to update any forward-looking statements.

Additionally, certain information discussed and presented may have been derived from third-party sources and has not been independently verified. Accordingly, BlackRock Capital Investment Corporation makes no representation or warranty with respect to such information. Please note, we've posted to our website an investor presentation that complements this call. Shortly, Jim will highlight some of the information contained in the presentation. The presentation can be accessed by going to our website at www.blackrockbkcc.com and clicking the May 2020 Investor Presentation link in the Presentations section of the Investors page.

I would now like to turn the call over to Jim.

James E. Keenan -- Interim Chief Executive Officer and Chairman of the Board

Thank you, Larry. Good morning, and thank you for joining our first quarter earnings call. I know this is a difficult time for many people. So first and foremost, I hope you, your families and your friends are all staying healthy and safe.

I would like to begin by saying that our investment and business teams are fully operational and engaged with our portfolio companies during this time of unprecedented business, economic and social disruption. We have been in regular and frequent contact with our portfolio companies to assess the impact on their finances and operations. The strength of BlackRock's technology platform and business continuity plans have allowed our teams to work remotely in a seamless manner.

I will provide an overview of key first quarter updates and the progress of our strategy. I will then turn it over to Mike Pungello, our Interim CFO, to discuss the financial results in more detail before providing some closing remarks and opening the call to questions.

We are pleased to report that the Company's stockholders approved a reduction in the minimum asset coverage ratio declining from 200% to 150%, which became effective on May 2, 2020. This provides the Company with significant additional operating flexibility. Although our long-term desired leverage range is 0.95 times to 1.25 times, we remain cautious about increasing leverage in this uncertain environment.

I note that our decision to seek shareholder approval excluded any COVID-related development and was a natural evolution of our strategy. Consistent with our strategy of reshaping the portfolio to provide a stable stream of income with limited volatility, our current priorities are focused on reducing our equity and non-core positions and redeploying capital into income-producing senior secured investments.

Since the beginning of 2019, we have made first or second lien loans to 30 new portfolio companies, increasing the total number of portfolio companies to 52. Over that period, first-lien investments have increased from 24% to 37% by fair market value, and total secured investments increased from 47% to 60%. We accomplished this as the non-core exposure declined to 14% of fair market value compared with 33% at the beginning of 2019.

Following the integration of Tennenbaum Capital Partners, the advisor now has over 50 investment professionals dedicated to our U.S. middle-market direct lending strategy, working with risk management, sourcing and other professionals within BlackRock. It is the advisor's current intention to continue to invest additional sourcing and underwriting capabilities.

We remain confident that despite the pandemic-related economic slowdown, our strategy of creating shareholder value through a more stable income-oriented book remains on course. We believe that this strategy will result in improved return on equity and bring the earnings power of the Company in line with the sector, while driving enhanced shareholder returns.

Turning to first quarter results. Net investment income for the quarter was $0.14 per share, nearly unchanged from the NII from the previous quarter. We deployed $37 million during the quarter, which was offset by $37 million of repayments and other exits, resulting in no change in the portfolio due to investment activity.

During the quarter, we added a total of five new names to the portfolio, which included four first lien and one second lien. We also received an $11.6 million return of capital from BCIC Senior Loan Partners, our joint venture. Our goal is to reduce the equity investment in the joint venture over time and redeploy capital into senior secured investments. The deployments and repayments are detailed in our earnings press release.

The weighted average yield of income-producing securities at fair market value was 10.3% as of March 31, down 60 basis points since last quarter, primarily driven by a decline in LIBOR rates. Quarter-end leverage was 0.85 times, up from 0.7 times over the prior quarter. Net asset value decreased from $6.33 per share last quarter to $5.35 per share as of March 31, driven by pandemic-related economic stress, tightening of credit spreads and the decline in comparable multiples.

The legacy non-core book, which represents 14% of the portfolio by fair market value at quarter end is comprised of, first, performing debt and income-producing securities at 11% by fair value, with AGY first lien, MBS first lien and Red Apple Stores being the three largest holdings; second, non-earning equities at under 1% by fair value, primarily consisting of U.S. Well equity; and third, investments on non-accrual at 3% by fair value, including AGY second lien and preferred stock, Sur La Table first lien, Advantage Insurance preferred stock and Advanced Lighting second lien.

Sur La Table was the only new non-accrual in Q1, as nationwide mall closures impacted the retailer significantly. Except for non-accrual investments, which totaled 3.2% of total debt and preferred stock at fair value, all portfolio companies have paid their interest on time during the first quarter and subsequently as of April 30. As of March 31, 86% of the Company's investment portfolio by fair market value was comprised of investments made by BlackRock Advisors.

Given the pandemic-driven uncertainties, we took the conservative step of reducing our dividend and paying a portion of dividend in stock. Our liquidity remains adequate, and unfunded commitments are small relative to the available liquidity. Our election to pay a portion of our dividend in stock was not driven by any requirement or request from our lenders. While we have sufficient liquidity to pay the dividend in cash, paying a portion of the dividend in stock conserves cash and builds net assets, providing additional cushion and operating flexibility in the event of additional pressures on marks due to the broader market weakness in the future.

Although the pandemic impacted market prices in the first quarter, we expect the full impact on Company's financial performance to be felt in coming quarters. However, as pandemic-related uncertainties ease and the financial markets stabilize, our goal will be to transition to an all-cash dividend and eventually grow the dividend level. Separately, we are working with our bank lenders to reset our financial covenant levels and incorporate the newly adopted 150% asset coverage ratio framework into our borrowing base calculation. Additionally, on May 2, our base management and incentive fee rates were lowered, as disclosed in the earnings release.

Before I turn the call over to Mike Pungello, I'd like to emphasize that while the impact of the shutdowns on many U.S. businesses remain uncertain, the Company has continued to increase diversity in its portfolio with limited or no new exposure to certain adversely impacted sectors, such as retail, energy, restaurants, leisure and hotels. We have historically operated the Company at modest leverage levels relative to the sector. Our risk management protocols are strong, and our workout capabilities are contested. We believe the Company remains essentially positioned to weather this economic crisis.

Over to you, Mike.

Michael Pungello -- Interim Chief Financial Officer and Treasurer

Thank you, Jimmy. I will take a few minutes to review additional financial and portfolio information for the first quarter of 2020. GAAP net investment income, NII, was $9.6 million with just over $0.14 per share for the three months ended March 31, 2020. Relative to distributions of $0.14 per share, our NII distribution coverage was 101% for the quarter.

Total investment income decreased $0.6 million or 3.2% as compared to the first quarter a year ago. Excluding fee income and other income, total investment income decreased by approximately 0.4%, primarily due to a lower rate environment and a decrease in dividend income period-over-period, the impact of which was partially offset by a 12.5% increase in the average investment portfolio at amortized cost for the comparative periods. The increase in portfolio size is primarily due to acquisitions throughout 2019.

At quarter-end, there were five non-accrual investments representing 3.2% and 9.8% of total debt and preferred stock investments at fair value and cost, respectively. This compares to non-accrual investments of approximately 2.4% and 6.9% of total debt and preferred stock investments at fair value and cost, respectively, at December 31, 2019.

Our average internal investment rating at fair market value at March 31, 2020, was 1.86 as compared to 1.39 as of the prior-quarter end.

Total expenses increased $1.2 million or 14.8% for the three months ended March 31, 2020 from the comparable period in 2019, primarily due to the increase in interest and credit facility fees and base management fees. In the first quarter, we voluntarily waived all of our incentive fees of $1.9 million, bringing our cumulative incentive fees waived since March 2017 to $25.3 million.

During the quarter, there was no accrual for incentive management fees based on gains. In the first quarter, net realized and unrealized losses were $68.8 million, predominantly driven by depreciation in our equity investments, in BCIC Senior Loan Partners, in the U.S. Well, our debt investments in AGY Holding and Sur La Table, and overall valuation depreciation across our portfolio as a result of macroeconomic conditions impacted by the COVID-19 outbreak.

During the first quarter of 2020, we repurchased 986,554 of our shares for $3.6 million at an average price of $3.68 per share, including brokerage commission. As of March 31, 2020, 4,013,446 shares remained available for repurchase under the current program. As of March 31, 2020, we had approximately $62 million of availability under our credit facility as well as in cash and cash equivalents.

With that, I would like to turn the call back to Jimmy.

James E. Keenan -- Interim Chief Executive Officer and Chairman of the Board

Thank you, Mike. In closing, I would like to take a moment to thank our stockholders for their continued support and recognize our team for their continued hard work. Most of all, I hope everyone remains safe and healthy during these challenging and uncertain times. This concludes our prepared remarks.

Operator, we can open the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we will take our first question today from Rick Shane with JP Morgan. Please go ahead.

Rick Shane -- JP Morgan -- Analyst

Hi guys. Thanks for taking my questions this morning. Look, obviously, we realize there's a lot moving around at the moment. When we look at sort of your top five or 10 investments, there were some pretty significant marks, First Boston Construction and AGY Holding, just curious -- and also St. George Warehousing. I'm curious if this is more marked to cash flow or this is really spread widening, and what you're seeing among your top investments in terms of actual fundamental performance.

R. Marshall Merriman -- Managing Director

Rick, this is Marsh Merriman. Thanks for your time and your question. Let me just speak generally through a couple of the names that you've mentioned. In thinking about valuations and performance with respect to First Boston, performance continues to be steady there. The valuation change was a change in -- was a reflection of a change in the valuation of the comp set for that business. And there's a consistent valuation approach here that has driven somewhat by trading multiples for the comp set. That's what accounts for that.

At AGY, that is a company that -- the topline performance of that company has continued to hold up, but profitability is under pressure as we have discussed before, due to a significant and atypical spike in one of the metals used in their production process. And so that has impacted profitability, which then impacted the valuation of the business in the market.

I think you had also asked about St. George. As you can imagine, St. George is a shipping and logistics company that deals with ocean freight. So it was one of the earliest companies to see impact from the COVID situation, which was reflected in its performance in the quarter and that was reflected in the valuation.

So, generally speaking, I would say that the valuations move around are a result of two things. One, the comp sets from these businesses are generally down for reasons we all understand, but they all have idiosyncratic reasons for their performance varying over the last quarter.

Rick Shane -- JP Morgan -- Analyst

Got it. Okay. Well, thank you for actually really differentiating those. That helps us understand the thought process on what's going on. So, I really value those insights.

R. Marshall Merriman -- Managing Director

You're welcome.

Operator

[Operator Instructions] And that will conclude our question-and-answer session. I'll turn the conference back over to James Keenan for any additional or closing remarks.

James E. Keenan -- Interim Chief Executive Officer and Chairman of the Board

Thank you. And again, I'd just like to thank everyone for the support. And obviously, we will continue to work through these uncertain times. And just to reiterate the point that I hope everyone get some times [Indecipherable] continue to be happy and healthy during this unique period of time. So, thank you for your time today.

Operator

[Operator Closing Remarks]

Duration: 19 minutes

Call participants:

Laurence D. Paredes -- General Counsel and Corporate Secretary

James E. Keenan -- Interim Chief Executive Officer and Chairman of the Board

Michael Pungello -- Interim Chief Financial Officer and Treasurer

R. Marshall Merriman -- Managing Director

Rick Shane -- JP Morgan -- Analyst

More BKCC analysis

All earnings call transcripts

AlphaStreet Logo